Steady growth confounds market expectations

· House prices rose 0.5% in February as annual house price inflation eases to 10.2%

· Homeowners now expect house prices to rise by just 1% over the next six months

· Equities and Gilts outperform housing over the last two decades


February 2005

Monthly index (seasonally adjusted) Q1 '93 = 100 309.9

Monthly change (seasonally adjusted) 0.5%

Annual change 10.2%

Average price £152,879

January 2005

Monthly index (seasonally adjusted) 308.4

Monthly change (seasonally adjusted) 0.4%

Annual change 12.6%

Average price £151,757

"Commenting on the figures Alex Bannister, Nationwide's Group Economist, said: “The price of the typical house increased by 0.5%1 in February. This followed January’s 0.4%

increase in prices and extends the period over which the trend has been for relatively subdued but steady price growth to seven months.

"Monthly house price inflation over the last three months has averaged 0.3% per month compared with the 1.7% per month over the same three-month period a year earlier. The price of the typical property now stands at £152,879; just over £14,000 or 10.2% higher than in February last year. Housing market activity, which had been slowing throughout the second half of last year, appears to have bottomed out. Following the lull towards the end of last year, homeowner and prospective buyer sentiment has stopped deteriorating and buyers may now start returning to the market.

"We expect that the number of house purchase mortgages approved in February will recover to at least 80,000 from the decade low approvals seen in January. Nevertheless, activity levels remain substantially below the peak of 132,000 cases per month reached at the end of 2003.

"The economic outlook remains benign with the economy expected to grow close to trend this year, with unemployment staying low. We expect that interest rates will rise once more, with the continued firmness of house prices making this more likely. Given this outlook, there are no obvious triggers on the horizon that might result in significant house price falls. House prices have already risen 0.9% so far this year. If this pace of increase persisted, prices would rise by just under 6% in the year to December; slightly above the 0-5% range we had expected.

"However, the likelihood remains that price growth will be muted with small rises in some months being offset by small falls in others. We still expect that the full year rise in prices to be nearer the bottom of the 0-5% range. The biggest risk has always been that generalised price falls might occur as a result of panic sales in a market with low transaction volumes. Price growth has, for some time now, been primarily linked to buyer expectations of future price growth. The downward adjustment in expectations over the last six to nine months has been key in bringing about, what appears at present to be, an orderly slowdown.

"Whilst properties that have been realistically priced are attracting interest, some sellers are attaching overly optimistic price tags to property and are seeing it remain on the market for long periods.

Evidence from the Nationwide Consumer Confidence survey shows that homeowner expectations of future house price growth declined sharply during the second half of 2004 but have been broadly stable since then. An additional survey carried out by Nationwide shows that homeowners now expect prices to rise by just 1% over the next six months2”.